Vancouverite Eric Migicovsky had an idea while he was studying engineering at the University of Waterloo: A wristwatch that would sync to a user’s smart phone, displaying incoming text messages and e-mail. When he couldn’t get venture capitalists to invest, he turned to a new way of raising the money he needed: crowdfunding.
Crowdfunding allows people to make small-scale investments to help launch a project or product. In exchange, the investor receives the product or a perk of some kind. (In the U.S., the investment can also become equity in the company. As I write this, equity crowdfunding isn’t legal in Canada, though several groups are lobbying for it, and governments appear to be listening.)
Each project has a money-raising goal and a deadline. If your project meets the target before the deadline, the money is released to you. If not, it goes back to the investors.
Migicovsky posted his Pebble Smart Watch project on Kickstarter, a New York-based crowdfunding platform. He was looking to raise $100,000. He got more than $10 million. That kind of success story is the exception, not the rule, but the funding model has worked for projects ranging from a pizza museum to a table salt shotgun for shooting insects. It could work for your project, too.
If you successfully meet your fundraising goal on a crowdfunding platform like Kickstarter or Indiegogo, the Canada Revenue Agency (CRA) treats that money as income, and it must be reported on the appropriate tax form.
Fortunately, the value of the perk or product delivered to micro-investors is considered an expense by the CRA, offsetting some of that income. You can claim the production cost of each unit as a business expense.
Remember, any money raised for your business is considered income even if you received it in small amounts. Make sure you report everything correctly so you do not have to spend any funds on penalties or interest.